This year’s budget capped off an extraordinary thirteen month period that saw the government promise more than $41 billion worth of new defence initiatives over eleven years: around $16 billion last budget, $14 billion this budget, and more than $11 billion in between.

Unfortunately, notwithstanding all the new money flowing into Defence, there remains a mismatch between plans and funding. Although the situation is better than it was last year, more money will still be required to deliver the government’s plans for the defence force.

How much are we spending?
- $22 billion in 2007-08
- $2.1 billion more than last year
- 2% of GDP

Total Defence Funding for 2007-08 will be $22 billion, which is an increase of $2.1 billion on 2006-07. Continued growth is planned across the next four years with a budget of $25.1 billion estimated for 2010-11. As a percentage of GDP the 2007-08 budget represents 2%, a level that has not been reached since 1995-96. This level of defence burden will probably be maintained over the next few years provided that predicted economic growth tracks planned defence spending.

$11 billion promised prior to budget
- ~$10 billion to expand the size of Army
- $260 million for operational supplementation
- $1 billion to boost recruitment and retention

In August 2006 the Prime Minister announced the expansion of Army by two light infantry battalions. Dependent on timing, the total cost is estimated to be about $10 billion. The expansion is planned to occur in two phases. Stage 1, funded at $4.1 billion over eleven years in Additional Estimates, will see a new battalion manned by the end of 2008 and ready to deploy by 2010. The timing of Stage 2 is pending.

In December 2006, the government agreed to implement a range of recruitment and retention initiatives for uniformed personnel, at a total cost of a little over $1 billion over eleven years. These include:
- targeted retention measures ($226 million)
- Navy allowances ($113 million)
- reform of Defence Force Recruiting ($371 million)
- Military Gap Year enlistment initiative ($306 million).

-- The government will provide $6.6 billion over 13 years (including $6.1 billion across the forthcoming decade) to acquire 24 F/A-18F Super Hornet multi-role aircraft, weapons and associated support, and to provide for personnel and operating costs to support the capability. Aircraft, weapons, facilities upgrades and training will cost $3.9 billion.

-- Recruiting and retention receives $2.1 billion over 10 years to further increase the number of people who join and remain in the military in addition to the $1 billion promised last year. Initiatives include:
- reform of the ‘other ranks’ pay scales ($585.4 million)
- enhancing financial assistance for home ownership ($863.8 million)
- further funding for Navy Sea Change program ($86.5 million)
- increasing funding for marketing and branding activities ($227.8 million)
- enhanced technical trade training opportunities ($71.0 million)
- professional development for ADF medical officers ($12.1 million)
- expanding and enhancing cadets ($100.0 million)
- transition service for personnel considering leaving service ($124.6 million).

-- $1.3 billion will cover the personnel and operating costs of the C-17 aircraft that are now entering service.

-- Military operations will consume $1.3 billion. That includes $389 million to continue operations in Iraq for another twelve months, $703 million to undertake an expanded role in Afghanistan for two years and $135 million for another year in Timor Leste. This brings the total cost of our role in the invasion, stabilisation and rehabilitation of Iraq to $2 billion. The corresponding figure for Afghanistan to $1.7 million.

-- $954 million over the next ten years has been provided to cover additional payments to the Defence Housing Authority to satisfy the government’s competitive neutrality policy.

-- $382 million will go to enhance Australia’s security and intelligence capabilities: $307.2 million for improved intelligence collection, processing and dissemination capabilities, and $75 million for the Defence Signals Directorate to increase the security and protection of government communications and information systems

-- $135 million has been provided over four years for enhanced protective security for Defence property and personnel in continuation of measures commenced in the aftermath of 9/11.

Is there enough money?

No. Although the situation is better than last year, further money will be required.

Despite the additional $1.8 billion of additional logistics funding in the budget, under current plans, rising personnel costs and escalating investment levels look certain to squeeze the money available for operating costs from 2008-09 onwards. Of particular concern is the absence of funds to cover all the additional personnel and operating costs of new equipment to be delivered over the next several years like AEW&C, Armed Reconnaissance Helicopters and Air to Air Refuelling, all due for delivery in 2009. Cost pressures also appear to be emerging in the investment program.

$1.8 billion of capital investment deferred

$1.8 billion of planned investment has been deferred in this budget, on top of $390 million deferred at the start of the year.

Approval of projects in the Defence Capability Plan has fallen behind schedule.

Due to delays in the AEW&C and M113 upgrade projects, $390 million of investment was deferred from 2006-07 into the two subsequent years. Now, in this budget, a further $1.8 billion was deferred to 2010-11 and beyond. In total, more than $2.1 billion of planned new capability will now arrive late. At the same time, the approval of new projects from the 2006 Defence Capability Plan has already fallen behind schedule even though the document is less than 12 months old.

Unfortunately, the mounting delays create a steep hill of planned new investment in the near future; what makes this year easier inevitably makes future years harder. Under current plans, investment in major capital equipment will grow from $4.8 billion in 2007-08 to $6.9 billion in 2010-11. Although some of this increase is due to off-the-shelf items like the C-17 and Super Hornet acquisition, much is not. A question mark hangs over the feasibility of the ambitious targets for investment over the next decade, especially given the skills shortage within the Australian economy. In may be that still further off-the-shelf foreign purchases will be necessary to deliver the government’s plans on schedule.

People

For the first time in three years the size of the permanent ADF has grown, albeit by only 325 personnel.

Over the three years to 2005-06, the strength of the permanent ADF fell by 929 people at a time when the goal was to increase the size of the force by a similar amount. For this reason, the increase of 325 personnel in 2006-07 to 51,476 is great news. Building on this, the government has set goals of 55,700 for 2010-11 and 57,000 for 2016-17 (plus another 1,000 once the next stage of the Army expansion is approved).

The budgeted strength of the ADF for 2007-08 is 52,505. This represents an increase of more than 1,000 personnel, including an additional 199 in Navy, 640 in Army and 190 in Air Force. With $3.1 billion allocated to improve recruitment and retention across the decade, the prospects look better than at any time since 2000. Given the volume of new capability on order, it is critical that the targets are met.

Following the release of the report of the 2007 Defence Management Review, Defence has embarked on a major reform program focusing on governance, accountability, ministerial support, personnel management and IT systems. Unfortunately, the Review did not recommend a detailed business model for Defence (this is presently the focus of an internal review). Nor did it identify how efficiency would be ensured. The outcome of the present reforms depends on decisions that are yet to be taken and on the boldness with which the CDF and Secretary attack the task.

Defence’s financial statements for 2005-06 received an ‘except for’ qualification which represents a solid improvement on that attained for the previous three years.

What’s next?

We need a funded long-term plan for the ADF.

The current piecemeal cycle of investment followed by bids for additional personnel and operating costs is no substitute for coherent long-term planning. Not only does it fail to provide incentives for Defence to deliver capability efficiently, but it robs the electorate of the ability to judge the opportunity cost of decisions.

With an election due this year, and fiscal rectitude at an all-time premium in the public eye, the question will be: how much will projected future surpluses need to be reduced to deliver the ADF that’s currently planned? Under the Charter of Budget Honesty we should find out one way or another.